If you’re looking to save on your tax bill or get a larger refund this year and happen to own a home, make sure you take advantage of these tax breaks.
Mortgage Interest Deductions
The home mortgage interest deduction can offer you one of the biggest tax breaks — if you purchased your house before December 16, 2017. If so, you can write off up to $1 million in interest on your home loan (or $500,000 for single filers).
However, if you purchased a home after that, you only qualify for a $750,000 deduction on mortgage interest payments (or $375,000 for single filers).
The cutoff date for homeowners who refinanced is the initial purchase date. Barbara Weltman, who wrote “JK Lasser’s 1001 Deductions & Tax Breaks 2021,” told US News My Money, “If you are merely refinancing the outstanding home acquisition debt that was obtained before December 16, 2017, the new mortgage is essentially treated as the old one. In other words, you can use the old $1 million limit.”
The IRS will send you Form 1098 with the amount of interest you paid that year. You can visit this page to learn more about this deduction. Keep in mind that the home mortgage interest deduction is only available to homeowners who itemize their deductions.
Home Equity Loan Deductions
Before the Tax Cuts and Jobs Act of 2017, you could write off up to $100,000 in interest on a home equity line of credit (HELOC) regardless of how you used the money.
That rule has since changed, and homeowners can only claim this benefit if they used the loan to purchase, construct, or make significant home improvements.
You can write off up to $750,000 in interest for eligible home loans such as your mortgage and a home equity loan for renovations.
Home Office Deductions
Are you self-employed? Then you can take advantage of the home office deduction. This benefit applies to those with freelance income who utilize an area in their house “regularly and exclusively” for work.
While it doesn’t have to be a proper home office, it must be a part of the house reserved only for work. However, if you supplement your primary income with side gigs or freelanced while in between jobs, you could qualify for this benefit.
You can claim the deduction in two ways:
- Based on your expenses: You can write off a part of your rent, mortgage, homeowner or renter insurance, and utilities relative to the proportion of your home office to the square footage of your home. Other eligible costs include pes control, homeowners association fees, repairs, and improvements.
- Simplified deduction: This deduction is simpler to calculate but only offers up to $1,500. With it, you can write off $5 for every square foot in your home office (up to 300 square feet).
Did you know you can avoid paying taxes on your home-sale profits? Many homeowners are unaware of this benefit, which can offer tax exclusions to $250,000 for single filers or $500,00 for joint filers.
This benefit is only available to those who reside in their home for two out of five years before selling it. If you lived in it for less than two due to qualifying life events, you could receive a partial exclusion determined by the number of months you did live there.
Even if your home-sale profits exceeded the tax exclusion, or you didn’t live in your home for two years, you could include a few bills on the cost basis to lower your tax liability.
Typically, the cost basis is how much you purchased the house for. However, you can include several other expenses to lower your tax bill, such as significant home improvements that raise your home’s value.
Make sure you save any invoices, receipts, and records, even if you intend to live in your home for the long term. This way, if you do get a taxable gain, you’ll have the necessary documents to include in the cost basis.
Additionally, you can include a portion of the closing cost, such as recording fees, surveys, transfer taxes, owner’s title insurance, sales commission, and more.
Owning a home is expensive, and it never hurts to save where you can. These tax breaks for homeowners can help you lower your tax bill so you can have more money for the things you want.
- Lankford, Kimberly. “Tax Benefits for Homeowners.” U.S. News & World Report, U.S. News & World Report, 22 Jan. 2021, money.usnews.com/money/personal-finance/taxes/articles/tax-benefits-for-homeowners.